Internal Analysis: Distinctive Competencies, Competitive Advantage ...

Chapter ThreeInternal

Analysis: Distinctive

Competencies, Competitive

Advantage, and

Profitability

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Internal Analysis includes an assessment of: Quantity and quality of a company’s

resources and capabilities Ways of building unique skills

and company-specific or distinctive competencies

Internal AnalysisThe purpose of internal analysis is to pinpoint the

strengths and weaknesses of the organization. Strengths lead to superior performance. Weaknesses lead to inferior performance.

Building and sustaining a competitive advantage requires a company to achieve superior:

• Efficiency• Quality

• Innovations• Responsiveness to customers


Internal Analysis: Strengths and Weaknesses

Internal analysis - along with the external analysis of the company’s environment - gives managers the

information to choose the strategies and business model to attain a sustained competitive advantage.

StrengthsOf the enterprise are assets that

boost profitability

Weaknesses Of the enterprise are liabilities that

lead to lower profitability


Internal Analysis: A Three-Step Process

1. Understand the process by which companies create value for customers and profit for themselves. Resources Capabilities Distinctive competencies

2. Understand the importance of superiority in creating value and generating high profitability. Efficiency Quality

3. Analyze the sources of the company’s competitive advantage. Strengths – that are driving profitability Weaknesses – opportunities for improvement

Innovation Responsiveness to Customers


Competitive Advantage Competitive Advantage

• A firm’s profitability is greater than the average profitability for all firms in its industry.

Sustained Competitive Advantage• A firm maintains above average and superior

profitability and profit growth for a number of years.

The Primary Objective of Strategyis to achieve a Sustained Competitive Advantagewhich in turn results in Superior Profit and Profit Growth.


Strategy, Resources, Capabilities, and Competencies

Figure 3.1


Competitive Advantage, Value Creation, and Profitability

1. VALUE or UTILITY the customer gets from owning the product

2. PRICE that a company charges for its products

3. COSTS of creating those products Consumer surplus is the “excess” utility a

consumer captures beyond the price paid.Basic Principle: the more utility that consumers

get from a company’s products or services, the more pricing options the company has.

How profitable a company becomes depends on three basic factors:


Value Creation per UnitFigure 3.2


Value Creation and Pricing Options

There is a dynamic relationship among utility,

pricing, demand, and costs.

Figure 3.3


Comparing Toyota and General Motors

Superior value creation requires that the gap between perceived utility (U) and costs of production (C)

be greater than that obtained by competitors.

Figure 3.4


The Value Chain

A company is a chain of activities for transforming inputs into outputs that customers value –

including the primary and support activities.

Figure 3.5


Building Blocks of Competitive Advantage

The Generic Distinctive Competencies

Allow a company to:• Differentiate product offering• Offer more utility to customer• Lower the cost structure regardless of the industry, its products, or its services

Figure 3.6


Efficiency Measured by the quantity of inputs it

takes to produce a given output: Efficiency = Outputs / Inputs Productivity leads to greater efficiency

and lower costs:• Employee productivity• Capital productivity

Superior efficiency helps a company attain a competitive advantage

through a lower cost structure.


Quality

• Reliable and • Differentiated by attributes that customers

perceive to have higher value The impact of quality on competitive advantage:

• High-quality products differentiate and increase the value of the products in customers’ eyes.

• Greater efficiency and lower unit costs are associated with reliable products.

Superior quality = customer perception of greater value in a product’s attributesForm, features, performance, durability, reliability, style, design

Quality products are goods and services that are:


A Quality Map for Automobiles

When customers evaluate the quality of a product, they commonly measure it against two kinds of attributes:1. Quality as Excellence2. Quality as Reliability

Figure 3.7


Innovation Innovation is the act of creating

new products or new processes• Product innovation

» Creates products that customers perceive as more valuable and

» Increases the company’s pricing options• Process innovation

» Creates value by lowering production costsSuccessful innovation can be a major source of competitive advantage – by giving a company something unique,

something its competitors lack.


Responsiveness to Customers

Superior quality and innovation are integral to superior responsiveness to customers.

Customizing goods and services to the unique demands of individual customers or customer groups.

Enhanced customer responsiveness Customer response time, design,

service, after-sales service and supportSuperior responsiveness to customers

differentiates a company’s products and services and leads to brand loyalty and premium pricing.

Identifying and satisfying customers’ needs – better than the competitors


Competitive Advantage: The Value Creation Cycle

Figure 3.8


Analyzing Competitive Advantage and Profitability

Competitive Advantage• When a companies profitability is greater than the average of all

other companies in the same industry that compete for the same customers

Benchmarking• Comparing company performance against that of competitors and

the company’s historic performance

Measures of Profitability• Return On Invested Capital (ROIC)• Net profit Net income after tax

Capital invested Equity + Debt to creditors

• Net Profit Net Profit = Total revenues – Total costs

= ROIC =


Definitions of Basic Accounting Terms

Table 3.1


Drivers of Profitability (ROIC)Figure 3.9


Comparing Wal-Mart to TargetFigure 3.10


The Durability of Competitive Advantage

1.Barriers to ImitationMaking it difficult to copy a company’s distinctive competencies Imitating Resources Imitating Capabilities

2.Capability of Competitors Strategic commitment

Commitment to a particular way of doing business Absorptive capacity

Ability to identify, value, assimilate, and use knowledge3.Industry Dynamism

Ability of an industry to change rapidly

The DURABILITY of a company’s competitive advantage over its competitors depends on:

Competitors are also seeking to develop distinctive competencies that will give them a competitive edge.


Why Companies Fail Inertia

• Companies find it difficult to change their strategies and structures

Prior Strategic Commitments• Limit a company’s ability to imitate and

cause competitive disadvantage The Icarus Paradox

• A company can become so specialized and inner directed based on past success that it loses sight of market realities

• Categories of rising and falling companies: • Craftsmen • Builders • Pioneers • Salespeople

When a company loses its competitive advantage, its profitability falls below that of the industry. It loses the ability to attract and generate resources.

Profit margins and invested capital shrink rapidly.


Avoiding Failure: Sustaining Competitive Advantage1. Focus on the Building Blocks of Competitive

Advantage Develop distinctive competencies and superior performance in:

Efficiency Quality Innovation Responsiveness to Customers

2. Institute Continuous Improvement and LearningRecognize the importance of continuous learning within the organization

3. Track Best Practices and Use BenchmarkingMeasure against the products and practices of the most efficient global competitors

4. Overcome InertiaOvercome the internal forces that are barriers to changeLuck may play a role in success,

so always exploit a lucky break - but remember:“The harder I work, the luckier I seem to get.” J P Morgan

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